In Windows NT, the HOSTS file is for TCP/IP utilities, and the LMHOSTS file is for LAN Manager NET utilities. If you cannot PING another computer (using a friendly name), check the HOSTS file. If you cannot NET VIEW a server using only the TCP/IP protocol, check the LMHOSTS file.
Netbeui won't do any good on the internet. Now Netbios (AKA MS client/MS file/print sharing) bound on the public interface would indeed be a security problem.
For the test just remember:
A hosts file resolves host names to ip addresses.
An lmhosts file resolves netbios names to ip addresses.